CooTek (Cayman) Inc.
Q1 2020 Earnings Call Transcript

Published: 15 May 2020

[Operator:]

Good day, good evening. Welcome to CooTek’s First Quarter 2020 Unaudited Financial Results Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded.I would now like to turn the conference over to Christian Arnell at Christensen. Please go ahead.

[Christian Arnell:]

Thank you. Hello, everyone. Thank you for joining us today. Our earnings release was distributed earlier today and is available on our IR website at ir.cootek.com and through PR Newswire services. On the call today from CooTek are Mr. Karl Zhang, Chairman and Chief Technology Officer; and Mr. Jacky Lin, Chief Financial Officer. Mr. Zhang will review business operations and company highlights, followed by Mr. Lin, who will discuss financials and guidance. They will both be available to answer your questions during the Q&A session that follows.Before we begin, I'd like to remind you that this conference call contains forward-looking statements within the meaning of Section 21E of the Securities and Exchange Act of 1934, as amended. These forward-looking statements are made under the Safe Harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements can be identified by terminologies such as will, expects, anticipate, future, intend, plans, beliefs, estimates, confident and similar statements.CooTek may also make oral forward-looking statements in its reports filed with or/and furnished with the U.S. SEC and its annual report to shareholders, in press releases and other written materials and oral statements made by its officers, directors or employees to third parties.Any statements that are not historical facts, including statements about CooTek's beliefs and expectations, are forward-looking statements that involve risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements.Such factors and risks include, but are not limited to the following; CooTek's mission and strategies; future business development, financial conditions and results of operations; the expected growth of the mobile Internet industry and mobile advertising industry; the expected growth of mobile advertising; expectations regarding the demand for and market acceptance of the company's products and services; competition in the mobile application, advertising industry; and relevant government policies and regulations relating to the industry.Further information regarding these and other risks, uncertainties and factors is included in the company's filings with the U.S. SEC. All information provided on this call is current as of today and CooTek does not undertake any obligation to update any such information, except as required under applicable law.It is now my pleasure to introduce Mr. Zhang. Karl, please go ahead.

[Karl Zhang:]

Thank you. Thank you, everyone, for joining our first quarter 2020 earnings call. We are excited to report yet another strong quarter where we outperformed our expectations. Total net revenue for the quarter grew 55% sequentially to be US$107 million, exceeding our guidance of $85 million by 26%.Total MAU for our content-rich portfolio apps grew nearly 20% sequentially to be 89% [89 million] (sic). Thanks to the strong growth of our in-house ad network and other business segments. Cash flow turned positive during the quarter. These reflect an exciting result and demonstrate our ability to derive sophisticated user insights and drive growth in both our user base and top-line. Our mission is to empower everyone to enjoy relevant content seamlessly, and we are confident in our ability to sustain healthy and strong growth momentum across all three content categories we are now focused on

[Jacky Lin:]

Thank you, Karl. And thanks, everyone, for joining us on the call today. I'm going to walk you through our first quarter financial results. All comparisons are on a year-over-year basis unless otherwise stated. So, let's talk about our users first. MAU, monthly active users, for our portfolio products reached 89.2 million in March, which was up 49% from a year ago, mainly because we continue to successfully develop and enlarge our basket of content-rich apps. For example, the MAU of casual games in March was 24.5 million, while it was close to zero from a year ago. Average DAU, daily active users, for our portfolio product in March reached about 25.2 million, up 9% compared with last year. Within this, the average DAU of the casual game in March was 2.6 million.Average DAUs of our TouchPal Smart Input product in March were about 136.5 million, down 6% from last year. MAUs were 178.8 million, down 7% from last year. Total net revenues were 107 million, up 167% from last year. Mobile advertising revenues were 106 million, up about 170% from a year ago. And within total net revenue for the first quarter of 2020, online literature and scenario-base content apps contributed about 66%, casual games contributed about 32%, TouchPal Smart Input contributed about 0.2% and TouchPal Phonebook contributed about 1%.Now, turning to expenses. GAAP costs and expenses were at about 117 million, an increase of 55% sequentially, and up 193% from the same period last year. Non-GAAP costs and expenses were 116 million, an increase of 55% sequentially, and an increase of 200% year-over-year. As a percentage of revenue, non-GAAP costs and expenses accounted for 108%, it’s flat with previous quarter.Sales and marketing expenses increased by 274% from the same period last year, and 61% sequentially. The largest component of these expenses is user acquisition costs. Currently, we are focusing on the content-rich portfolio strategy. As such, we are investing to expand the user bases of these portfolio products and counter-based content ecosystem. And thanks to our user insight driven growth platform, we now have a strong growth momentum with a deeper level of ROI, and user retention. We are confident that we will be able to maintain fast revenue growth in the coming period and achieve future profitability.R&D expenses increased by 19% sequentially and by 3% year-over-year, primarily due to an increase in costs associated with technology R&D staff and share-based compensation expenses. We ended the quarter with 577 full-time employees, up 7% from last year. R&D employees represent about 61% of the total employees, compared with 63% last year. G&A expenses increased by 20% sequentially, and by 41% year-over-year. This sequential increase was mainly due to a reversal of bad debt provision during last quarter of US$0.6 million. The year-over-year increase was mainly due to an increase in costs associated with the G&A staff and share-based compensation expenses.While, nevertheless, G&A expenses as a percentage to total net revenue was 3%, it’s a decrease from 4% last quarter, and we are keeping the expenses under control. Our gross margin was 95.7% up from 91.2% during the same period last year, and an increase from 94.4% last quarter. The increase are mainly due to the greater economies of scale, as we better utilize our infrastructure.We had a GAAP net loss of US$9.7 million, which represents a net loss margin of 9.1%. Excluding the effects of stock compensation, our adjusted net loss was approximately US$8.8 million, representing a non-GAAP net loss margin of 8.2 million -- 8.2%, sorry. As of March 31, 2020, we had cash, cash equivalents and restricted cash of about US$70 million, compared with US$60 million at the end of the year 2019. We had positive operating cash flow this quarter, despite the turbulence of the macro environment. This was primarily because we grew our in-house ad network, which helped us achieve a quicker turnaround of working capital.Last year, we launched our share repurchase program, where we’re authorized to purchase up to US$6 million of our ADS during the six month period starting on November 20, 2019. Until the end of April, we have used an aggregate of US$5.8 million to repurchase 1 million ADS. And we will early terminate the 2019 program on May 18, 2020 and take effect a new share repurchase program on the same day. In the new share repurchase program, we are authorized to repurchase up to US$20 million during the 12-month period starting from May 18, 2020. And we expect to fund the repurchases with our existing cash balance.Turning now to our revenue outlook. We expect total revenue in the second quarter of 2020 to be around US$120 million, representing an increase of 219% year-over-year and 12% quarter-over-quarter. These estimates reflect our current and preliminary view which is subject to change.So now, operator, we're now ready to take questions.

[Operator:]

[Operator Instructions]. The first question comes from Ivy Liu of Credit Suisse. Please go ahead.

[Ivy Liu:]

So my question is, what is your current growth strategy and funding strategy on your online literature reading app?

[Karl Zhang:]

Thank you. Thank you for your question. So we are very optimistic and passionate about online literature market. So reading is one of the very fundamental content need, no doubt. And a lot of people enjoy reading books in different categories. So we are actually talking about 200 million DAU global market size potentially. The online literature is not a new segment in mobile Internet industry. But we believe by taking advantage of new technology and new growth philosophy, there are opportunities to disrupt this market. And the point is, once, if this market is disrupted, surely huge potential in this market will be released, which makes the market much bigger than ever before. So I'm not -- maybe I'm not in a right position to comment on our competitors, but we believe that we have different growth philosophy and point of view on this market.So our proven sophisticated user insight driven growth platform, together with our in-house ad networks forms a solid foundation of our growth capability. So our platform and apps are working together as a whole to ensure our competitiveness on ROI, user retention and other key metrics. So the company ecosystem is also a key success for online literature market for sure. So we don't think that it's about the size of the ecosystem. So we are establishing an online literature content ecosystem in a very cost effective way with our growth philosophy to support long-term growth in this content segment. So we have already launched our in-house online literature marketplace to directly work with writers and help them submitting novels and making money.And also as I mentioned that we see online literature as a enormous global opportunity. So we are incubating our online literature app in multiple countries and regions. We will discuss -- disclose more detailed information when it's ready. Thank you.

[Operator:]

The next question comes from the location of Nelson Cheung and Alicia Yap of Citigroup. Please go ahead.

[Nelson Cheung:]

I have two questions for management. My first question is for online gaming. Given 2.6 million DAU and 32% revenue mix, could you share with the rough breakdown of DAU coming from China and overseas markets given the global lockdown continues in second quarter? Do you think the DAU and revenue for overseas games will increase more meaningfully? Or do you think the increase will still come from domestic gaming users? How much of the strong performance of gaming was driven by stay-at-home versus your ability to come up with more interesting games? So do we anticipate the users in gaming revenue for second quarter in China to remain strong, despite work resumption?My second question is regarding the advertising outlook. With the global slowdown coming out from the COVID-19, how do you anticipate the impact to overall on that ad related CooTek platform? Have you seen more cautious budget allocation so far from global advertisers and domestic advertisers? And do you see any shift of the advertising industry categories within your ad revenues?

[Karl Zhang:]

Thank you for your question. Let me answer one by one. So the first question is about the online gaming. In terms of the game business, we are focusing on casual games at this moment because they are most useful for our advertising business model. So as of today, we have already released over 10 casual games. And our first wave of successful casual games includes MOD games such as Idle Land King Tycoon and simulation games such as Farm Hero and puzzle games such as Crazy Painting in which we run ad. And Q1, we extended our success to elimination game by [hunter series], such as [high hunter]. By leveraging our user insight driven growth platform, these casual games delivered better than expected ROI and contributed 32% of our total revenue.We do expect that the revenue contribution from casual game will continue to increase in the coming couple of quarters. Although we don't disclose detailed breakdown on user distribution, I’m waiting -- still waiting to give some general information about this topic. So -- because all of our games are initially released in China market, the most of the DAU for our casual games at this moment is mainly in China region. In fact, we have already rolled out casual games to overseas markets and we anticipate to seeing strong growth in the second half of this year in overseas market competently.Well, actually, I don't think that our game benefits a lot from the quarantine. With our casual game business in solid state, from Q2, we started to focus on improving game quality, localization and user retention. So we expect to see improvements in terms of the retention rate and ARPU in Q2, which continues to drive the strong performance of our casual game business. We are very confident on that. Thank you for this question.And another question is actually about the pandemic. So the pandemic impacted Chinese domestic advertising industry, because some of the major advertisers were cutting budgets, which caused the ARPU approximately 10% to 15% lower than our expectations mainly in February and March. But I think the worst case -- the worst time has passed and the market is recovering, although not that strong but still recovering. So we expect that the market will return to its normal status in June for China market. But frankly, this year is not a good year for ad business even without this pandemic in China. It takes time to digest the increasing ad inventory and the relatively weak demand sentiment. And this is about China market.And the global advertising industry is pretty much replicating the trend happening in China. So now the worst panic moment has passed in U.S. as industry based on our observation. The budget is recovering, not that strong recovery and eCPM is recovering as well. And I think with the reopening of U.S. and other countries, the market will return to its normal track I think going into the early Q3.And in terms of the advertiser industry categories, there was no significant change on our platform. So I think local services such as the food delivery service and e-commerce are growing fast which compensated the strength of other services.

[Operator:]

Thank you. The next question comes from Hans Chung of KeyBanc Capital Markets. Please go ahead.

[Zoe Deng:]

Hi, management. This is Zoe on behalf of Hans. And thank you for taking my question. So my question is regarding the second quarter guidance. Can you share some color on what the drivers of the second quarter revenue growth? And how do you see the profitability in second quarter?

[Karl Zhang:]

So let me answer this question. So by leveraging our sophisticated growth platform, we replicate our success in three content categories already. And we believe that our sophisticated growth platform and our advanced growth philosophy is a key factor to content app growth today. So it makes us confident on not only Q2, but our long-term growth. In terms of Q2 specifically, all I can say at this moment is that we are executing pretty well. And as I mentioned that our priority at this stage is to grow the user base of our company's portfolio of apps rapidly and further cultivate our content-rich ecosystem. Meanwhile, we are also optimizing the profitability. With the strong revenue growth and ROI improvement, we expect a percentage of total revenue of sales and marketing expense will decrease about 8% in the second quarter, which drive the profitability much better than Q1.

[Operator:]

Thank you very much. This concludes our question-and-answer session. I would like to turn the conference back over to Christian Arnell for any closing remarks.

[Christian Arnell:]

Thank you. This concludes our call for today. If you have any further questions or comments, please don't hesitate to reach out to the CooTek IR team. Thank you for joining. Have a good day or evening. Good bye.

[Operator:]

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.